Zhdanov Inc. forecasts that its free cash flow in the coming year, i.e., at t =

Question

Zhdanov Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm's value of operations, in millions?

$158                             
           $167                             
           $175                             
           $184                             
           $193

Explanation / Answer

Hi,

Please find the answer as follows:

FCF1 = -10000000

FCF2 = 20000000

FCF3 = 20000000*(1.04) = 20800000

Firm's Value of Operations = -10000000/(1+.14)^1 + 20000000/(1+.14)^2 + 20800000/(.14 - .04)*(1+.14)^2 = 166666666.67 or 167 million.

Answer is 167 million.

Thanks.

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